1. a) Referring to Table 1, why the difference in the premiums on a Feb 360 call
ID: 2668726 • Letter: 1
Question
1. a) Referring to Table 1, why the difference in the premiums on a Feb 360 call vs. the Feb 380 put?
b) Referring to Table 1, suppose you found a Feb 370 put outside of class and picked it up (its free!!). If you exercised it (use Table 1 for all info), how much money would you make / lose? Please show all work.
c) If instead of exercising as above, you decided to check out what the Feb 370 put would sell for on the Chicago Board of the Options Exchange (CBOE) . Table 1 of course is from the CBOE so that we can easily identify the price that you could sell the option that you found for. What is the amount you can sell it for and why is this amount so different than the amount you made or lost by exercising it?
d) Suppose that you are bearish on Google and buy one Feb 370 put on Feb 04 (Table 1) and then close by selling on Feb 06 (Table 2). How much money would you make/lose and what is your rate of return?
e) Suppose instead that you held your position until Feb 10 (Table 3). What is your profit/loss now and rate of return (this is all relative to your initial purchase of the put on Feb 04 (Table 1).
f) Now depict the evolution of the premium of your 370 put assuming that you purchased it on Feb 04 and the price of Google at expiration is as it is on Feb. 04 (Table 1), i.e., we are ‘freezing’ the price of Google from its value in Table 1 until expiration (we did this in class). On your diagram, have the vertical axis represent the premium (price of the option) and have the horizontal axis represent time.
Explanation / Answer
Simply put the deciding factor on premiums is whether people think the market price of the stock will go up or go down. Hence, if people think a stock will go up the call options will have higher premiums and if they think it will go down then put premiums will be higher. Depending on where the price is trading currently and the trend in the market will decide premium. That should answer (a). To calculate profit or loss. Take the put or call and add on the premium to the stock price. Then take the difference in sale price as your profit. If the stock is trading at 100 and you paid 20 per share for the call@ 75. You have tenatively made 5 dollars per share. This applies to puts if you sell higher. Hope this helps dont have more time.
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